Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 2 - Addressing underperformance in superannuation

Outline of chapter

2.1 Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as 'trustee-directed products' where the trustee has control over the design and implementation of the investment strategy). A trustee providing such products will be required to give notice to its beneficiaries who hold a product that has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product. APRA may lift the prohibition if circumstances specified in the regulations are satisfied.

2.2 Consistent with the recommendations of the Productivity Commission review into superannuation, the intent of these changes is to subject all APRA-regulated superannuation funds to annual performance tests for their MySuper and other products specified in the regulations (recommendation 4). The amendments seek to ensure that superannuation products have their performance assessed against an objective, consistently-applied benchmark, giving greater transparency to beneficiaries and protecting beneficiaries from underperforming products. These amendments also include measures to strengthen APRA's powers to manage underperforming products.

Context of amendments

2.3 The superannuation system currently manages around $3 trillion of retirement savings of Australians and its compulsory nature means that the Government has a heightened responsibility in holding funds to account and protecting member outcomes. Several reviews, including the Productivity Commission's review into superannuation, have found that persistently underperforming funds are a flaw of the system. These amendments build on the existing law to strengthen the protections against underperformance in the industry.

Existing law

Section 52 covenants and the annual outcomes assessment

2.4 The operation of registrable superannuation entities are subject to a range of regulatory requirements to protect beneficiaries. These include obligations on trustees of registrable superannuation entities to comply with covenants under the SIS Act.

2.5 Section 52 of the SIS Act sets out a number of covenants that are taken to be included in the governing rules of registrable superannuation entities.

2.6 Currently, under subsections 52(9) to 52(11) of the SIS Act trustees of regulated superannuation entities have an obligation to conduct a self-assessed annual outcome assessment for MySuper and choice products.

2.7 This annual outcomes assessment was introduced in April 2019 and requires trustees to consider whether the assessed product is promoting the financial interest of beneficiaries with regard to several criteria including the product's risk, return, and fees and costs.

2.8 A trustee that contravenes a section 52 covenant is subject to a civil penalty order (see sections 54B and 193 of the SIS Act). Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies. Trustees may be liable for fines up to 2,400 penalty units (which is equivalent to $532,800, as of 1 July 2020), and for serious breaches, imprisonment for not longer than five years (see sections 196 and 202 of the SIS Act).

2.9 Both ASIC and APRA have administration of the section 52 covenants (see table item 18 in the table in subsection 6(1) of the SIS Act).

2.10 The annual outcomes assessment does not include an objective, consistently-applied performance test or include immediately operative consequences for underperformance.

APRA's powers to establish prudential standards

2.11 Under the current law, APRA is granted a rule making power to establish prudential standards, and other components of the prudential framework. This is aimed at maintaining the financial soundness of RSE licensees and their registrable superannuation entities, ensuring that RSE licensees protect the interests, and meet the reasonable expectations, of beneficiaries of registrable superannuation entities, and other prudential matters.

2.12 For the banking, insurance and superannuation industries, APRA has developed a comprehensive framework of prudential standards and prudential practice guides. APRA's standards set out minimum financial, governance, operational and risk management requirements. The prudential practice guides set out APRA's expectations on the implementation of its standard and set out APRA's view as to what amounts to best practice.

2.13 Under Part 3A of the SIS Act, APRA has the power to establish prudential standards relating to prudential matters (see section 34C of the SIS Act). Currently, APRA does not have an explicit power to establish prudential standards for resolution planning as this is not a prudential matter as defined by the SIS Act.

Productivity Commission review into superannuation

2.14 The Productivity Commission review into superannuation found that entrenched underperforming superannuation products are a structural flaw in the superannuation system. In order to address persistent underperformance and increase beneficiaries' retirement savings, the Productivity Commission recommended requiring all APRA-regulated superannuation funds to be subject to annual outcomes tests for their MySuper and other offerings, with direct consequences for failing the test (recommendation 4).

Summary of new law

2.15 Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as trustee-directed products). A trustee providing such products will be required to give notice to its beneficiaries where their product has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee will be prohibited from accepting new beneficiaries into that product. APRA may lift the prohibition if circumstances specified in the regulations are satisfied.

Comparison of key features of new law and current law

Detailed explanation of new law

2.16 Schedule 2 to the Bill inserts a new Part 6A into the SIS Act, which provides that:

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APRA must conduct an annual performance test, each financial year, on 'Part 6A products';

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APRA must notify trustees of the superannuation products of the results of the annual performance test;

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Trustees of superannuation products that fail the annual performance test must notify beneficiaries who hold the product, that their product has failed the annual performance test; and

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Trustees of superannuation products that fail the annual performance test in two consecutive years are prohibited from accepting new beneficiaries into the superannuation product, unless APRA lifts the prohibition (if circumstances specified in the regulations are satisfied).

2.17 The Schedule inserts a definition of 'Part 6A product'. The definition provides that a 'Part 6A product' is a MySuper product or a class of beneficial interest in a regulated superannuation fund, if that class is identified by regulations. For example, this could include trustee-directed products. [Schedule 2, items 5 and 9, subsection 10(1) and section 60B of the SIS Act]

2.18 It will be considered a contravention of a covenant (see sections 54B and 193 of the SIS Act) for a trustee to fail to comply with the notification requirements or prohibition on accepting beneficiaries.

2.19 The amendments also provide APRA with a resolution planning prudential standard making power and make amendments facilitating the implementation of the YourSuper comparison tool announced by the Government as part of the Your Future, Your Super reforms.

Annual performance test conducted by APRA

2.20 Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other classes of beneficial interest in a regulated superannuation fund to be specified in regulations (such as trustee-directed products). A trustee providing such Part 6A products will be required to give notice to its beneficiaries where their product has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product.

2.21 The annual performance test applies in relation to regulated superannuation funds (other than a regulated superannuation fund with fewer than 5 members). This ensures that the annual performance test will not apply in relation to other registrable superannuation entities or SMSFs. [Schedule 2, item 9, subsection 60C(1) of the SIS Act]

2.22 APRA must determine whether a Part 6A product has passed or failed the annual performance test. This means the annual performance test will apply to Part 6A products, including MySuper products and other classes of beneficial interest in a regulated superannuation fund specified in regulations (such as trustee-directed products). [Schedule 2, item 9, subsection 60C(2) of the SIS Act]

2.23 APRA must conduct the annual performance test for each financial year and notify trustees in writing of APRA's determination of the test results within a period, starting after the end of a financial year, set out under the regulations. [Schedule 2, item 9, subsections 60C(2), (3) and (4) of the SIS Act]

2.24 Within the same period, APRA must publish the test results on a website maintained by APRA. [Schedule 2, item 9, subsection 60C(5) of the SIS Act]

2.25 APRA's determination of the results of the annual performance test will not be a 'reviewable decision' within the meaning of the SIS Act. This is because the test results are based on product performance compared to relevant benchmarks over the assessment period. The methodology to calculate a product's performance and benchmark will be clearly specified in regulations.

2.26 The requirements for the annual performance test will be set out in regulations. It is expected that the regulations will be made for this purpose that include, but are not limited to the following matters:

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specifying requirements in respect of investment returns (which may be net of fees and taxes); and

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specifying requirements that depend on the exercise of a discretion by APRA; and

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specifying matters that APRA may or must take into account in exercising such a discretion; and

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allowing APRA to make specified assumptions in exercising such a discretion.

[Schedule 2, item 9, subsections 60D(1), (2), (3) and (4) of the SIS Act]

2.27 Furthermore the amendments clarify that, in specifying requirements, regulations may include requirements based on a comparison between actual returns for a product and a benchmark return. The regulations may include different methods for these calculations. Such methods may involve assumptions to be made in applying the method, which may be specified in the regulations, such as assumptions as to rates of tax or fees or other matters. The regulations may also set out circumstances (including pre-conditions for) when APRA has discretion to depart from such assumptions by legislative instrument. [Schedule 2, item 9, subsections 60D(5), (6), (7) and (8) of the SIS Act]

2.28 For example, it may be appropriate to depart from assumptions specified in the regulations about fees and taxes, if the fee or tax environment changes and the assumptions in the regulations become out of date. This flexibility allows APRA to respond to changes in a timely fashion to ensure the test operates as intended over time.

2.29 The regulations may later be updated to reflect the updated set of assumptions. This may include updates that apply to past periods (periods occurring before the regulations are made) if the regulations provide the same assumptions as those specified by APRA in exercising its discretion. [Schedule 2, item 9, subsections 60D(9), (10) and (11) of the SIS Act]

2.30 This power will ensure that a consistent set of assumptions will apply for each past period in each application of the annual performance test. Making such regulations will ensure a complete record of all the assumptions that have been used in the annual performance test is available on the publicly available statute book, which provides transparency and certainty. As the regulations may only apply the same assumptions that were applied by APRA in the past to past periods, funds will not be disadvantaged by regulations that change assumptions for past periods.

2.31 None of the clarifications to the regulation making power for the annual performance test (described above) are intended to limit the scope of regulations that may be made. [Schedule 2, item 9, subsection 60D(12) of the SIS Act]

2.32 The amendments also clarify that the regulations outlining the annual performance test may provide for a matter by incorporating external material as in force or existing from time to time. [Schedule 2, item 9, subsection 60D(13) of the SIS Act]

2.33 It may be appropriate for the regulations setting out the annual performance test to incorporate a range of materials by reference. For example, it may be necessary for regulations to refer to APRA reporting standards, under which funds report investment information to APRA. Such information could form the basis of data used in the annual performance test calculations.

2.34 It may be necessary for regulations to refer to such instruments as in force, to ensure the annual performance test is based on data that was reported to APRA in relation to past periods. It may also be appropriate for regulations to refer to such instruments as they exist from time to time to ensure that any future changes in the reporting of data to APRA is reflected in the annual performance test. APRA's reporting standards are legislative instruments and therefore publicly and freely available on the Federal Register of Legislation.

Regulations may allow different performance requirements for different products and provide APRA with flexibility in applying the test

2.35 This regulation making power operates broadly to allow different performance requirements to be specified for different classes of products (such as trustee-directed products). This allows circumstances to be specified where the annual performance test applies or does not apply for particular classes of products. It would also allow a different annual performance test to apply for a particular class of product. It also allows regulations to prescribe circumstances where APRA has discretion on these matters. [Schedule 2, item 9, subsections 60D(1) and (4) of the SIS Act]

2.36 The annual performance test is generally intended to assess long term investment performance of a product. As such, the regulations could ensure the performance test generally only applies for products with a minimum number of years of performance. For example, the regulations could provide that a product that has less than a few years of performance history need not meet any performance benchmarks unless APRA has exercised discretion to require the product to meet a benchmark.

2.37 The regulations can also provide discretion to APRA to depart from this general rule relating to the application of the annual performance test to ensure trustees cannot create 'new' products to deliberately avoid being subjected to the new performance test. The regulations could further provide that APRA consider particular matters in exercising this discretion.

Regulations may allow the performance of 2 or more products to be assessed together

2.38 For the purposes of new Part 6A of the SIS Act (or specified provisions in Part 6A), the regulations may specify circumstances in which two or more Part 6A products (the single Part 6A product) may be treated as being one Part 6A product (the combined Part 6A product). The regulations may specify circumstances where anything happening in relation to one of the products is to be treated as having happened in relation to the combined product. [Schedule 2, item 9, paragraphs 60G(2)(a) and (b) of the SIS Act]

2.39 The single Part 6A product can include a product that originated from a product that has ceased to exist (a replaced product). For example, in a merger situation there are two products from two different funds that are merged. One of the funds has ceased to exist and the merged fund continues to offer the product. The regulations may specify circumstances that treat anything that happened in relation to the replaced product as having happened in relation to the single product (and therefore as having happened in relation to the combined product). [Schedule 2, item 9, paragraph 60G(2)(b) and subsections 60G(3) and (4) of the SIS Act]

2.40 This will allow regulations to be made to ensure that the annual performance test can be appropriately applied in a range of situations. For example, where a trustee transfers beneficiaries from a product that is close to failing (or has previously failed) the annual performance test into a new but similar product. This could be done to bypass the consequences of failing one or more annual performance tests.

2.41 For example, in circumstances specified in the regulations (such as where APRA considers it appropriate that the performance of the products be considered together), the performance history of the underperforming product could be attributed to the new similar product.

2.42 The amendments clarify that regulations made for this purpose may include but are not limited to the following matters:

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specifying requirements that depend on the exercise of a discretion by APRA; and

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specifying matters that APRA may or must take into account in exercising such a discretion; and

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allowing APRA to make specified assumptions in exercising such a discretion. [Schedule 2, items 9, subsections 60G(6) and (7) of the SIS Act]

2.43 The amendments allow regulations to treat products as combined only for the purposes of certain provisions in new Part 6A (or for the whole of Part 6A). For example, two or more products may be treated as combined for the purposes of the rules providing the annual performance test requirements but not for the purposes of the rules triggering the prohibition on accepting new beneficiaries into the product. [Schedule 2, item 9, subsections 60G(1) and (5) of the SIS Act]

Results of annual performance test to be factored into annual outcomes assessment

2.44 Trustees must take into account the results of the annual performance test when completing their annual outcomes assessment. Trustees of a product that fails the annual performance test will find it very difficult to show that the product is promoting the financial interests of beneficiaries in their annual outcomes assessment. [Schedule 2, item 7, subparagraph 52(9)(a)(iv) of the SIS Act]

Notification of underperformance by trustees to beneficiaries

2.45 The Schedule amends the SIS Act to require a trustee of a superannuation product to give notice to its beneficiaries who hold the product, generally within 28 days of APRA giving notice of the test results, where the product has failed the annual performance test. The notification must be provided via pre-paid post or by courier and electronically to a beneficiary's nominated electronic address (if there is a nominated electronic address), and in accordance with the form and content requirements specified by regulations. A trustee will be required to notify beneficiaries for each year that a product fails the annual performance test. This notification will ensure that beneficiaries are made aware that their superannuation product is underperforming. [Schedule 2, item 9, subsections 60E(1), (2), (3) and (5) of the SIS Act]

Consequences of failing to notify

2.46 The civil penalty for trustees who fail to notify beneficiaries is 2,400 penalty units (which is equivalent to $532, 800, as of 1 July 2020). As the obligations are part of the section 52 covenants the civil penalty draws on existing civil penalty regime under the SIS Act (see sections 54B and 193 of the SIS Act).

2.47 The penalty is the same as the penalty for other civil penalty provisions of the SIS Act and has the same the purpose to achieve the aim of deterrence. The civil penalty provides a deterrent from breaching the relevant notification requirement provisions and ensures that appropriate penalties are available depending on the nature of the breach. The maximum penalty amount enables courts to impose proportionate penalties in light of the circumstances of the contravention.

2.48 Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies. The maximum sentence for such a contravention is five years imprisonment (see section 202 of the SIS Act). The aim of the offence and its sanction is to provide a deterrent from breaching the relevant notification requirement provisions.

2.49 Contraventions could cause harm to beneficiaries as they would not be given notice that their superannuation product is underperforming. This information could assist beneficiaries as they make decisions that affect their retirement incomes. A breach could also give a trustee an unfair advantage over trustees of other superannuation products who are complying with the notification requirement.

2.50 The Guide to Framing Commonwealth Offences was considered in determining the applicable civil penalty amount and criminal offence. It is important that an appropriate range of options are available for responding to contraventions. The ability to impose civil penalties provides a deterrent, and encourages the provision of information to beneficiaries in a context where that information may allow a beneficiary to make informed decisions regarding their financial interests. The availability of a criminal offence and sanction for contraventions that involves dishonesty or an intention to deceive or defraud reflects the more serious nature of such breaches.

Timeframe for notification

2.51 Generally, the notification to beneficiaries must be given within 28 days of APRA giving the trustee notice of the test results. However, both ASIC and APRA may in writing defer the due date for the trustee to notify beneficiaries. This discretion would be used in very limited circumstances where the information would be redundant or not relevant to a member, such as if a fund was undertaking a successor fund transfer. In this situation, it would be appropriate for the underperformance notification due date to be deferred. ASIC and APRA jointly administer the notification requirement as it relates to a covenant in section 52 of the SIS Act. As the notification by trustees is a disclosure obligation, it is expected that the discretion would generally be exercised by ASIC. . [Schedule 2, item 9, subsections 60E(3) and (4) of the SIS Act]

Requirements of the notification

2.52 The notification must be given to members via pre-paid post or by courier. The notification must also be given electronically to a beneficiary's nominated electronic address. However, if the beneficiary has not provided an electronic address, no electronic notification is required. The intent is to maximise the chances that a member of a fund will read and engage with the notification. Some members are more likely to engage with a hard copy letter, while others might find it easier with an email. [Schedule 2, item 9, subsection 60E(5) of the SIS Act]

2.53 In the context of civil proceedings for a failure to notify under these rules, section 323 of the SIS Act provides a defence from liability, which may apply in circumstances where a trustee reasonably relies on incorrect or outdated information given in relation to contact details.

2.54 The notification to beneficiaries must be consistent with any form and content requirements about the notification prescribed by regulations. This could mean that a superannuation product's underperformance must be worded and presented in a clear, concise and effective manner. Regulations may also specify information that is a standard text or standard texts, including specifying a model notification letter. These clarifications to the regulation making power do not limit the scope of regulations that can be made about the form and content of the notification. [Schedule 2, item 9, paragraph 60E(6)(a) and subsections 60E(8) and (9) of the SIS Act]

2.55 These requirements ensure that there will be a consistent approach taken to how information about underperformance is presented by all trustees who must comply with the new obligation.

2.56 The regulations may specify that information relating to the ranking of products according to relative fee levels, investment returns or other metrics be included in the notification. This could be satisfied by the notification incorporating by reference material from a website maintained by the Australian Taxation Office, as in force or existing from time to time. [Schedule 2, item 9, paragraph 60E(6)(b) and subsection 60E(7) of the SIS Act]

2.57 This ensures that the regulations could require the notification to include a link to the YourSuper comparison tool, announced by the Government as part of the Your Future, Your Super reforms, to empower beneficiaries to compare and select a superannuation product that meets their needs.

2.58 Incorporating material into the notification as it exists from time to time will ensure that the most up-to-date comparison information is provided by trustees to beneficiaries. The material to be incorporated by reference will be publicly and freely accessible.

Prohibition against accepting beneficiaries into underperforming superannuation products

General operation of the new prohibition

2.59 Schedule 2 to the Bill also amends the SIS Act to prohibit superannuation trustees from accepting new beneficiaries into products that have failed the annual performance test in two consecutive years. [Schedule 2, item 9, subsections 60F(1) and (2) of the SIS Act].

2.60 As compliance with the prohibition is part of the section 52 covenants, the maximum penalty for accepting new beneficiaries into underperforming superannuation products is the same penalty that applies if a trustee contravenes a section 52 covenant (see sections 54B and 193 of the SIS Act). [Schedule 2, item 8, subsection 52(14) of the SIS Act]

2.61 The prohibition prevents individuals from entering persistently underperforming superannuation products. That is, existing beneficiaries of the entity who do not hold the product will not be permitted to switch into the product and individual beneficiaries will not be able to acquire the product.

2.62 Beneficiaries who hold an interest in a product at the time the product becomes subject to a prohibition may continue to hold the product. Such beneficiaries are also not precluded from continuing to make contributions to that product.

2.63 Generally, trustees will still be able to accept a beneficiary into another product offered by the trustee where that other product is not subject to a prohibition. That is, the prohibition operates at the product level, rather than the superannuation entity level.

Exception from the prohibition

2.64 However, the prohibition on accepting new beneficiaries into a product does not apply in relation to a person who becomes a beneficiary as a result of a payment split within the meaning of the Family Law Act 1975. This ensures a trustee can create a new interest for a non-member spouse in a product to give effect to a payment split. [Schedule 2, item 9, subsection 60F(9) of the SIS Act]

Operation of the prohibition in special cases involving 2 different products failing the annual performance test in consecutive years

2.65 The amendments provide that for the purposes of new Part 6A of the SIS Act, the regulations may specify circumstances in which two or more Part 6A products (the single Part 6A product) may be treated as being one product (the combined Part 6A product). The regulations may also specify circumstances where holding a product should be considered holding the combined product. [Schedule 2, item 9, paragraphs 60G(2)(a) and (c) of the SIS Act]

2.66 This means that despite the prohibition generally operating at the product level, the amendments allow regulations to specify the circumstances where two products offered that fail the annual performance test in two separate but consecutive years may both be subject to the prohibition. That is, the first product fails the test in a year and a second product fails the test in the following year.

2.67 For example, this will allow regulations to deal with a situation where the trustee has begun offering or transferred beneficiaries to a new but substantially similar product. This might be done in an effort to avoid being subject to the prohibition. In such a case, no singular product has failed the annual performance test in two consecutive years, but it may nonetheless be appropriate for a prohibition to be imposed on both products for the protection of beneficiaries given the similarity of the two products.

Lifting the prohibition

2.68 The amendments allow APRA to determine that the prohibition be lifted where the requirements to be specified in regulations have been met. This will allow the regulations to specify the criteria for when a superannuation product may re-open to new beneficiaries based on when the product's performance has improved. [Schedule 2, item 9, subsections 60F(3) and (4) of the SIS Act]

2.69 APRA's determination that the prohibition should be lifted comes into force on the day the determination is made or a later day specified in APRA's determination. [Schedule 2, item 9, subsection 60F(5) of the SIS Act]

2.70 APRA must give a copy of the determination to the trustee as soon as practicable after making it. [Schedule 2, item 9, subsection 60F(6) of the SIS Act]

2.71 The amendments clarify that such a determination by APRA is not a legislative instrument within the meaning of section 8 of the Legislation Act 2003. The determination relates to a specified product offered by a specified entity (that is, it applies the law in a particular circumstance and is administrative in character). The clarification is included to assist readers of the legislation and is merely declaratory of the law. [Schedule 2, item 9, subsection 60F(7) of the SIS Act]

2.72 If APRA makes a determination that the prohibition should be lifted, this does not prevent APRA from making a later determination to prohibit superannuation trustees from accepting new beneficiaries into products that have failed the annual performance test in two consecutive years. The earlier lifting of the prohibition does not prevent the later determination from applying. The amendments clarify this, for the avoidance of doubt. For example, if the re-opened product fails the annual performance test in another 2 consecutive years, the trustee could be prohibited from accepting members into the product again (until another APRA determination is issued to lift the second prohibition). [Schedule 2, item 9, subsection 60F(8) of the SIS Act]

APRA notification to Fair Work Commission

2.73 APRA must also notify the Fair Work Commission in writing of its determination that a MySuper product is prohibited from accepting new beneficiaries, and of its determination that a prohibition is lifted. [Schedule 2, item 9, subsection 60F(10) of the SIS Act]

APRA resolution planning prudential standards power

2.74 Schedule 2 to the Bill also amends the SIS Act to provide APRA with a resolution planning prudential standard making power that relates to facilitating the resolution of an RSE licensee, a registrable superannuation entity or a connected entity of an RSE licensee, in order to best protect the interests of beneficiaries. [Schedule 2, item 6, paragraph 34C(4)(ea) of the SIS Act]

2.75 However, for facilitating the resolution of a connected entity of an RSE licensee, it must be reasonably necessary to:

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facilitate the resolution of the RSE licensee; or

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facilitate the resolution of the registrable superannuation entity; or

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protect the interests of the beneficiaries of the registrable superannuation entity; or

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meet the reasonable expectations of the beneficiaries of the registrable superannuation entity.

[Schedule 2, item 6, subparagraphs 34C(4)(ea)(iii), (iv) (v) and (vi) of the SIS Act]

2.76 The amendments amend the definition of a 'prudential matter', and insert the definition of 'resolution' into subsection 10(1) of the SIS Act. The definition has the same meaning as it does in the other industry Acts (see Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995). [Schedule 2, items 5 and 6, subsection 10(1) and paragraph 34C(4)(ea) of the SIS Act]

2.77 This ensures that APRA has clear powers to set appropriate prudential standards on resolution planning, and ensure that RSE licensees put in place measures to improve their preparedness for resolution. This allows APRA to ensure RSE licensees are prepared for a range of contingencies, including the possibility that the prohibition against accepting new beneficiaries into a product may lead to a material deterioration in the financial condition of the regulated superannuation fund.

2.78 Under the other industry Acts, the term 'prudential matters' is important in determining the scope of the prudential standard-making powers of APRA and the matters for which standards may be made. However, this term is currently defined differently in the SIS Act and other industry Acts, as the SIS Act does not currently contain any specific reference to resolution. That resolution planning is not included in the SIS Act as a prudential matter may lead to uncertainty regarding APRA's ability to make prudential standards relating to the resolution of an RSE licensee and in some cases their connected entities.

2.79 The amendments harmonise the definition of 'prudential matters' across the industry Acts by incorporating a specific reference to resolution under the SIS Act. The amendments also clarify APRA's ability to require RSE licensees and their connected entities to take actions to address potential barriers to orderly resolution.

Amendments facilitating implementation of the YourSuper comparison tool

2.80 The YourSuper comparison tool will be available on an interactive website designed to make it easy for beneficiaries to choose a superannuation product based on fees and performance information. The amendments in this Schedule facilitate implementation of this website.

2.81 The amendments allow regulations to specify one or more formulas that form the basis for the ranking of, superannuation products. The formulas assist products to be ranked according to specified metrics including fee levels, investment returns or any other criterion. [Schedule 2, item 9, subsection 60J(3) of the SIS Act]

2.82 This provides transparency and certainty about the basis by which superannuation products will be ranked on the YourSuper website.

2.83 The Schedule amends the SIS Act to allow APRA to share information about Part 6A products with the ATO, which the ATO may make available on a website maintained by the ATO, without breaching secrecy provisions. If the disclosure of information is for the purposes of the new SIS Act provisions then subsection 56(3) of the Australian Prudential Regulation Authority Act 1998 provides an exception to the secrecy offence in subsection 56(2) of that Act. In giving information to the ATO, APRA may take into account the regulations specifying formulas and methods. [Schedule 2, item 9, subsections 60J(1), (2), (3) and (4) of the SIS Act]

2.84 The amendments clarify that the information may be made available by making it available in response to a user query or by providing a list of ranked products, or displayed in a range of different ways. This reflects the intent to design an interactive, user friendly website. [Schedule 2, item 9, subsections 60J(5) and (6)]

2.85 It is expected that APRA will provide data and ranking instructions to the ATO (based on the formulas set out in the regulations) to allow the website to be built and be updated over time. The ATO's role in maintaining the website does not constitute the provision of financial advice.

2.86 As soon as practicable after receiving the information from APRA, the Commissioner of Taxation must ensure that the information relating to MySuper products is published on the website. [Schedule 2, item 9, subsection 60J(4) of the SIS Act]

Consequential amendments

2.87 The amendments insert definitions of 'resolution' and 'Part 6A product' in the definitions section of the SIS Act. [Schedule 2, item 5, subsection 10(1) of the SIS Act]

Administration arrangements

2.88 The amendments provide that ASIC has administration of the new Part 6A amendments about annual performance assessments introduced by these amendments to the extent the provisions relate to disclosure or record-keeping, and APRA has administration to the remaining extent. [Schedule 2, item 4, table item 21A in the table in subsection 6(1) of the SIS Act]

2.89 Both ASIC and APRA have administration of the Part 6A amendments that relate to consequences of 2 consecutive fail assessments and that relate to notifying beneficiaries of the fail assessments. [Schedule 2, item 4, table items 21B and 21C in the table in subsection 6(1) of the SIS Act]

2.90 The ATO has administration of the amendments facilitating the implementation of the YourSuper comparison tool relating to the information being made publicly available. APRA has administration of the amendments facilitating the implementation of the YourSuper comparison tool relating to giving information to the ATO. [Schedule 2, item 4, table items 21A and 21D in the table in subsection 6(1) of the SIS Act]

Protecting employers from breaching other rules, where products are closed to new beneficiaries

Protecting employers from breaching rules about contributing to a particular fund

2.91 The Schedule includes amendments to ensure that an employer is not in breach of various rules where they are prevented from making contributions to a fund on behalf of their employees because the funds' products are closed due to underperformance. This covers rules in Commonwealth laws, State or Territory laws, including industrial awards. [Schedule 2, items 3 and 9, section 32ZAB of the SGAA and section 60H of the SIS Act]

2.92 The amendments ensure that if certain criteria are established, rules that require an employer to contribute to a particular superannuation fund (or class of funds) on behalf of their employees are not enforceable. The criteria for these protections to operate are that the employer cannot make contributions to the relevant default fund (or class of funds) because a product offered by the fund is subject to the prohibition on accepting new beneficiaries into the underperforming product. [Schedule 2, item 9, subsection 60H(3) the SIS Act]

2.93 The amendments also provide that the terms 'employer', 'employee', 'Commonwealth industrial award', 'State industrial award' and 'Territory industrial award' have the same meaning as in the SGAA for the purposes of these rules. [Schedule 2, item 9, subsection 60H(4) of the SIS Act]

2.94 The amendments also override rules that require a particular fund to be the sole eligible choice fund for an employee. This includes laws such as section 15 of the Australian Defence Force Superannuation Act 2015 (which requires ADF Super to be the sole eligible choice fund for certain employees) and section 16 of the Superannuation Act 2005 (which requires PSSAP to be the sole eligible choice fund for certain employees). The amendments allow regulations to specify additional superannuation funds with analogous provisions, which may be overridden. [Schedule 2, item 3, section 32ZAB of the SGAA]

2.95 For the listed superannuation funds (ADF Super and PSSAP), including those listed in regulations, the criteria for these rules to be overridden are that the employer cannot make contributions to the relevant sole eligible choice fund because a product offered by the fund is subject to the prohibition on accepting new beneficiaries into the underperforming product. [Schedule 2, item 3, subsection 32ZAB(1) of the SGAA]

2.96 The Schedule also amends an existing provision of the SGAA to clarify the intended interaction between the override rules in that Act and the Fair Work Act 2009. This change is consistent with other amendments in the Bill to the existing overriding provisions in the SGAA which ensure they continue to operate appropriately where a conflict could arise between that Act (as amended) and the Fair Work Act 2009. These amendments make it clear that Part 3A of the SGAA, including the override rules in that Part, are able to be prioritised over conflicting provisions in the Fair Work Act 2009. [Schedule 2, item 1, subsection 5B(1) of the SGAA]

Protecting employers from breaching rules about the superannuation guarantee charge

2.97 The Schedule makes amendments to the SGAA to ensure an employer is not liable for superannuation guarantee charge in certain circumstances. [Schedule 2, item 2, subsection 23(6A) of the SGAA]

2.98 Where one or more products offered by a fund are closed due to underperformance, there is a possibility that an employer is unable to make a superannuation guarantee contribution on time because an earlier attempt to make the contribution failed. In such circumstances, the employer may become liable to pay a superannuation guarantee charge through no fault of their own. The amendments ensure that employers are not penalised for a late contribution (made later than 28 days after the end of the quarter) provided the contribution is made within 56 days after the end of the quarter.

2.99 The criteria for the rule to operate are that:

•

the employer has attempted to make a contribution for the benefit of the employee (and if it had been successful, it would have met the superannuation guarantee contribution deadline (that is, it would have been made within the period of 28 days after the end of the quarter); and

•

the attempt was unsuccessful due to one or more products in the fund being closed to new members under the prohibition introduced in this Schedule; and

•

the employer has successfully made the contribution to another fund within 28 days after the superannuation guarantee contribution deadline (that is, within 56 days after the end of the quarter).

Contingent amendments

2.100 Part 3 of the Schedule makes amendments contingent on the commencement of Schedule 1 to the Treasury Laws Amendment (Self Managed Superannuation Funds) Act 2020, which amends the SIS Act to increase the maximum number of allowable members from four to six in SMSFs. It amends the definition of self managed superannuation fund in section 17A, repealing paragraph 17A(1)(a) of the SIS Act which says 'it has fewer than 5 members' and substitutes the paragraph with 'it has no more than 6 members'.

2.101 The contingent amendments ensure that where SMSFs are carved out under the amendments introduced in this Schedule, SMSFs continue to be carved out in the event that the basic conditions for what constitutes a self managed superannuation fund changes. [Schedule 2, items 11 and 12, subsections 52(14) and 60C(1) of the SIS Act]

2.102 Part 3 of the Schedule also makes amendments contingent on the commencement of the Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020. The Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020 implements a referral of powers from Western Australia by introducing Part VIIIC in the Family Law Act 1975, which applies specifically to Western Australian de facto couples who wish to split their superannuation interests. Part VIIIC is broadly equivalent to Part VIIIB of the Family Law Act 1975, which contains superannuation splitting provisions that apply to married and de facto couples in other jurisdictions.

2.103 The contingent amendments ensure that the reference to the definition of a payment split in Part VIIIB of the Family Law Act 1975 will also reference the equivalent definition in the new Part VIIIC. [Schedule 2, item 13, paragraph 60F(9)(a) of the SIS Act]

Application and transitional provisions

2.104 The amendments relating to the new annual performance test apply in relation to MySuper products on and after 1 July 2021 and in relation to other classes of beneficial interest in a regulated superannuation fund specified in the regulations on and after 1 July 2022. This will include the amendments protecting employers from breaching other rules, where products are closed to new beneficiaries and facilitating implementation of the YourSuper comparison tool. [Schedule 2, subitem 10(1)]

2.105 The amendments introducing a new resolution planning prudential standard making power for APRA and clarifying the interaction between the override rules in the SGAA and the Fair Work Act 2009 apply on the day after Royal Assent. [Schedule 2, subitem 10(2)]